It's No Longer Just a Trade War Between the US and China

The U.S. confrontation with China that has been ramping up over the past year due to heightened trade tensions, military showdowns, and diplomatic ill will escalated to new levels on Thursday with a double-barreled assault on Beijing’s growing economic and geopolitical heft.

U.S. Vice President Mike Pence delivered the administration’s most searing indictment yet of the threat that China’s rise poses to U.S. interests generally—and the Trump administration in particular—in a much-anticipated speech Thursday. The same day, a Bloomberg Newsreport citing current and former U.S. intelligence officials alleged that Chinese army elements hacked Chinese-manufactured hardware used by dozens of big U.S. technology firms and government entities, raising serious questions about the security of Chinese-made gear and the country’s future role in the global high-tech supply chain.

Pence, in a speech meant to highlight what he called China’s pushback against the Trump administration’s tough stance toward Beijing, attacked China’s “meddling in America’s democracy,” though he offered no new evidence for the administration’s claim that Beijing is interfering in next month’s U.S. midterm elections. Among a litany of other complaints about Chinese behavior, Pence also specifically denounced China’s state-led trade and economic practices that “have built Beijing’s manufacturing base, at the expense of its competitors—especially America.”

The speech was a resounding rejection of the policy that U.S. leaders have generally pursued for more than two decades, seeking greater trade ties with Beijing, bringing the country into the World Trade Organization, and investing heavily in its economic modernization.

“America had hoped that economic liberalization would bring China into greater partnership with us and with the world,” Pence said in his speech at the Hudson Institute in Washington. “Instead, China has chosen economic aggression, which has in turn emboldened its growing military.”

The administration on Thursday also accused China of deliberately trying to undermine U.S. national security by targeting the nation’s defense industrial base. A Pentagon-led review of the defense industry, ordered by Trump, pegs China as one of the primary culprits in what it called “predatory practices.” These include “state-sponsored dumping, public subsidies, and intellectual property theft,” which the report said “are destroying commercial product lines and markets of domestic [Defense Department] suppliers.”

That report and the vice president’s speech reflected the Trump administration’s growing view of China as a rival to be confronted rather than a rising power to be embraced and co-opted into the international system. It also suggested that what began as a tariff war is hardening into a long-term standoff on many levels.

“A strategy seems to be emerging that is much more centered on competition and the notion of China as a rival,” said Elsa Kania of the Center for a New American Security. She called the adjustment “appropriate, even overdue,” but stressed the need for continued cooperation and engagement given the “risks of miscalculation between great powers.”

But the vice president’s rhetorical broadside may not have been the day’s biggest blow to Beijing’s ambitions. Also on Thursday, a Bloomberg Newsreport suggested that the Chinese are actively engaged in just the sort of the great-power rivalry outlined by Pence.

The outlet reported that People’s Liberation Army units allegedly inserted a tiny, modified component onto some hardware manufactured at a Chinese factory for a U.S. technology supplier to huge firms such as Apple and Amazon. The illicit component could reportedly give Chinese authorities the ability to eavesdrop on or even commandeer the computer gear used in a host of applications. U.S. officials had been investigating the allegations of Chinese tampering with gear made in mainland China for at least four years, the article said.

Apple and Amazon both vehemently denied the article’s assertions and said that they had found no indication that their servers were compromised.

U.S. officials had long voiced security concerns about gear made by Chinese firms such as Huawei and ZTE Corp. But the report, suggesting that U.S.-made computer products that rely on some Chinese manufacturing could be vulnerable, reflects a growing concern about the risks inherent in a sprawling, global supply chain.

The Bloomberg report comes after a raft of warnings from the U.S. government about supply chain security in high technology. The National Counterintelligence and Security Center in its annual report on economic espionage specifically flagged the emerging threat of foreign attacks on software supply chains.

And a report prepared for the U.S.-China Economic and Security Review Commission this spring highlighted the specific threats posed by China’s increasingly central role as a supplier for high-technology gear, especially for products used by government agencies.

But the allegations that Chinese state-controlled entities had managed to essentially hack a central piece of hardware—the kind of server used by all sorts of big companies—sent a chill through the technology community.

“There have been concerns about potential vulnerabilities resulting from extensive entanglement in supply chains for quite some time. Clearly, China has ample opportunities to exploit or weaponize its access to elements of the U.S. supply chain, given how much is made in China,” Kania said. “If the report is true, then it would seem to confirm the worst fears on that front.

“The details that have come out so far may be only the tip of the iceberg, perhaps hinting at a much deeper compromise of the U.S. national security innovation ecosystem,” she added.

Importantly for China and its quest to become a high-tech manufacturing powerhouse in areas like semiconductors and fifth-generation mobile telephone technology, the mere suggestion that Chinese factories represent a security risk could be a fatal blow.

“It could be a before-and-after moment in China’s relationship with the world, in terms of its role as a technology manufacturer,” said Jorge Guajardo, a former Mexican ambassador to China who is now a business consultant.

China, the United States, and other countries are currently competing to see which will develop the technology standard for next-generation mobile phones. Concerns that Chinese-made gear could be infiltrated with backdoors and security vulnerabilities is a body blow to China’s aspirations, Guajardo suggested.

“Any government that wants to use China’s 5G technology is going to be asked, what do you say about this?” he said.

The reputational damage from reports that China’s military can hack hardware on the factory floor will ripple outward to other big Chinese ambitions, he said, including China’s plan to dominate the global semiconductor industry. To justify the multibillion-dollar investments China needs to make in order to compete in that industry, it needs to be able to confidently market its wares around the world—but those markets could now be less willing to consider Chinese-made technology, Guajardo said.

Throwing cold water on China’s manufacturing plans and pushing supply chains back to the United States is a big goal of the Trump administration, in everything including steel, autos, and high tech. But that’s not to say that bringing back the high-tech supply chains from China to the United States will be an easy task. For years, companies in a host of different sectors have cut costs and increased their competitive edge by outsourcing key bits of the entire production process.

Trying to bring back all that manufacturing would require first untangling convoluted supply chains where it can be hard even today to identify which subcontractor in which country made which component, then investing the money to be able to build those components elsewhere.

In the meantime, countries like the United States will probably have to start by trying to tighten quality-control and inspection regimes for technology components.

“The question of how to implement effective security controls on technology acquisition in the real world is a daunting prospect,” said Bob Stratton, a former official at In-Q-Tel, a technology investment organization that develops projects for the U.S. intelligence community. He suggested some common norms, foreign-policy efforts, and independent testing might help get a handle on the security risks.

“‘Buy American’ is probably a vastly oversimplified approach to what is arguably a shared global risk,” he said.